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Canada

Jennifer Wells: Hudson’s Bay should stay public — so we can see what chair Richard Baker is up to

During a conference call with analysts on Tuesday, Helena Foulkes, chief executive officer of the Hudson’s Bay Co., was asked how the all-important Christmas season was shaping up for the Bay.

“In early November we were quite soft in Canada,” Foulkes replied. But that was followed by better news: the retailer went on to experience what Foulkes described as a “good Thanksgiving.”

The comment may have gained no notice among the number crunchers. But for anyone fussy about heritage and history and, well, Canada, suggesting that Canadians celebrate Thanksgiving in November underscored what has long seemed a dissonant relationship between the storied retailer’s American rulers and beleaguered Bay shoppers wondering what’s next for the chain.

Third-quarter results tell a story of a turnaround not yet in sight. Peeling away the sales performance at Saks and Saks Off 5th, Bay store sales decreased 3.9 per cent from the comparable quarter in 2018. Adding in the Saks operation and peeling away losses from discontinued operations for the company overall, HBC posted a loss of $175 million compared with a $70-million loss in 2018.

Having exited various ill-conceived adventures — the Netherlands operation filing for protection from creditors, by example — the Bay bricks-and-mortar stores make up the draggiest part of the operation.

Foulkes noted a positive trend in the “home” category at Bay stores, but a challenging evolution in apparel as management continues to edit out hundreds of old brands while introducing more “fashion forward” lines. “It’s not moving as fast as I would like to see it moving, quite frankly,” she told analysts. In a press release Foulkes noted “the challenge of winning back market share in Canada.”

Who else is confident that Foulkes is driving the chain on what she calls the “right journey?”

It’s easy to lose track of the consumer-centric story line as HBC plays through a high-level battle led by chairman Richard Baker, backstopped by shareholders who hold 57.7 per cent of the company, to take HBC private. Baker’s $10.30-a-share offer is set to go to a shareholder vote next week.

Maybe.

On Wednesday the Ontario Securities Commission will consider an application brought forward by activist investor Catalyst Capital, which argues that the share offer is inadequate and that the Baker group should be “prohibited permanently” from proceeding with the buyout. Failing that, Catalyst, with 17.5 per cent of the shares, requests that the commission issue an interim order postponing the meeting, scheduled for Dec. 17. Catalyst has made its own $11-a-share offer.

For Baker’s proposal to succeed, a majority of the minority shareholders must vote in favour. The chances of that happening are surely diminished by the recommendation issued by Institutional Shareholder Services.

Citing inadequacies in the diligence conducted by the special committee struck to determine the best path forward for the company, ISS, which is enormously respected in these matters, has recommended that shareholders vote against the Baker group’s offer. “There is no legitimate rationale from a governance perspective for recommending that shareholders accept C$10.30 cash per share in light of what appears to be a legitimate outstanding offer to purchase the company at a higher price,” ISS concludes, advising shareholders to vote against the Baker offer.

Interestingly, the ISS examination of Baker’s actions juxtaposes HBC’s sale of certain European operations with the announced decision to try to go private, an offer initially priced at $9.45. In its Dec. 6 research note ISS drilled into the matter thusly: “In light of i) the materiality of the SIGNA transaction to HBC’s value, ii) the possible conflict of interest between Baker as executive chairman voting on an asset sale and Baker as unsolicited acquirer, and iii) the absence of a positive disclosure that members of the continuing shareholder consortium had no knowledge of the SIGNA transaction, it is reasonable that shareholders could question whether material nonpublic information was used to assemble the consortium of continuing shareholders.”

If the securities commission is paying attention, it should conclude Wednesday that it has little choice but to hit pause on Baker’s latest round of deal making.

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Baker, a real estate guy, has always run our most historic company as his personal fief. That has only been reinforced by his actions as HBC chair representing the shareholder group trying to buy out the minority. Whose interests are being served? Baker’s. Who is in conflict here? Baker.

Helena Foulkes insists it hardly matters whether HBC goes forward as a public or private entity. I disagree. Only through its public disclosures have we been able to examine what Baker is up to.

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